Johannesburg, 31 January 2018 — Global Credit Ratings has today affirmed the national scale Issuer ratings assigned to Netcare Limited at A+(ZA) and A1+(ZA) for the long and short term respectively; with the outlook accorded as Stable.
*For the purposes of these ratings, Global Credit Ratings (“GCR”) has focused on the extent to which Netcare Limited’s (“Netcare” or “Netcare SA”) local Rand-denominated cash flows cover Rand-denominated debt service and operational obligations.
SUMMARY RATING RATIONALE
Global Credit Ratings has accorded the above credit ratings to Netcare based on the following key criteria:
The ratings reflect Netcare’s strong market position as one of the largest private healthcare groups in South Africa and the UK. Supporting the group’s diversity of services has been its continuous infrastructural development in expanding its network of hospital brands and primary care centres, as well as prioritisation on state-of-the-art equipment and procedures.
Netcare SA’s financial performance remains sound, despite facing increasingly challenging trading conditions. With patient volumes pressurised and a change in the mix of caseloads, revenue growth eased to a marginal 1%, whilst softer margins were reported. That said, earnings capacity is still deemed to be robust, with margins to be supported by strategies to improve occupancy levels and remedial action undertaken on underperforming segments.
Notably, strong operating cash flows have resulted from Netcare’s relatively moderate and largely predictable working capital requirements, which have enabled it to sustain its on-going capex activity largely from internally generated funds. As such, Netcare SA’s low levels of debt continue to underpin conservative gearing levels. Net gearing and net debt to EBITDA registered at 31% and 98% respectively at FY17 (FY16: 31% and 87%). Cognisance is also taken of the sound cash flow coverage ratios and gross interest coverage, which has remained above 7x over the review period.
Domestic economic weakness and structural shifts in the operating landscape are likely to continue to weigh on growth momentum despite the largely defensive nature of the industry. This could be compounded by regulatory headwinds, which remain uncertain.
Whilst the ratings focus on Netcare’s local businesses, consideration is given to the UK business as the units remain closely linked in terms of overall group performance, and factors that would impair the financial strength of this entity could potentially impact the South African business. FY17 group earnings were adversely impacted by significant once-off non-cash impairment adjustments on the UK operations. As this is deemed a core market, Netcare intends to acquire full shareholder control of its subsidiary (subject to conditions precedent), with priority centred on implementing cost saving measures to improve the sustainability of the business. Although Netcare is not guarantor on the UK debt obligations, it could provide financial support to this entity if deemed necessary.
A ratings upgrade could derive off the back of a demonstrated track record of revenue and earnings growth over the longer term, as well as improved diversification, in conjunction with stronger credit protection measures. Conversely, a protracted/material weakening in performance, and/or higher gearing, even to fund strategic capex, could bode negatively. The ratings could also be downgraded if GCR comes to expect that free cash flows will be used to sustain the UK operations.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (January 2001)|
|Long term: A-(ZA)
Short term: A1-(ZA)
|Last rating (January 2017)|
|Long term: A+(ZA)
Short term: A1+(ZA)
|Senior Analyst: Corporate ratings|
|Sector Head: Corporate ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Corporate Entities, updated February 2017
Netcare rating reports, 2001-17
RATING LIMITATIONS AND DISCLAIMERS
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GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATE GLOSSARY
|Capital||The sum of money that is invested to generate proceeds.|
|Cash Flow||The inflow and outflow of cash and cash equivalents arising from operating, investing and financing activities.|
|Credit Rating||An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.|
|Debt||An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.|
|Diversification||Spreading risk by constructing a portfolio that contains different investments, whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.|
|Gearing||With regard to corporate analysis, gearing (or leverage) refers to the extent to which a company is funded by debt and can be calculated by dividing its debt by shareholders’ funds or by EBITDA.|
|Impairment||Reduction in the value of an asset because the asset is no longer expected to generate the same benefits, as determined by the company through periodic assessments.|
|Interest||Scheduled payments made to a creditor in return for the use of borrowed money. The size of the payments will be determined by the interest rate, the amount borrowed or principal and the duration of the loan.|
|Interest Cover||Interest cover is a measure of a company’s interest payments relative to its profits. It is calculated by dividing a company’s operating profit by its interest payments for a given period.|
|Long-Term Rating||A long term rating reflects an issuer’s ability to meet its financial obligations over the following three to five year period, including interest payments and debt redemptions. This encompasses an evaluation of the organisation’s current financial position, as well as how the position may change in the future with regard to meeting longer term financial obligations.|
|Margin||A term whose meaning depends on context. In the widest sense, it means the difference between two values.|
|Operating Cash Flow||A company’s net cash position over a given period, i.e. money received from customers minus payments to suppliers and staff, administration expenses, interest payments and taxes.|
|Shareholder||An individual, entity or financial institution that holds shares or stock in an organisation or company.|
|Short-Term Rating||A short term rating is an opinion of an issuer’s ability to meet all financial obligations over the upcoming 12 month period, including interest payments and debt redemptions.|
|Working Capital||Working capital usually refers to the resources that a company uses to finance day-to-day operations. Changes in working capital are assessed to explain movements in debt and cash balances.|
SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating process was influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
Netcare Limited participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit ratings have been disclosed to Netcare Limited with no contestation of the ratings.
The information received from Netcare Limited and other reliable third parties to accord the credit ratings included:
- the Integrated Report for the year to 30 September 2017, as well as for the preceding four years;
- financial statements for the South African operations for 2017, as well as for the preceding four years; and
- results booklets and presentations for 2017, and preceding financial years; and debt maturity schedule for the South African operations at FY17.
The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.
GCR affirms Netcare Limited’s rating* at A+(ZA); Outlook Stable.